The Truth about Fannie Mae and Freddie Mac

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Gretchen Morgenson was the keynote speaker last week at the 2015 Page One Awards banquet. Of all of the topics that Ms. Morgenson could have covered in her speech, she chose to address the lingering issues around the government take-over of Fannie and Freddie. Specifically, she addressed the complicity that many journalists have played in the scandal.

Among other important points in the speech goo.gl/b7TR2J , Gretchen said,

“My second issue is closer to home — and it concerns the state of journalism today. That is, the rise of access journalists — those whose stories help their hidden sources promote themselves and their views — and the decline in accountability journalists. These are the folks who seek to hold powerful people responsible for their actions. Who, as the saying goes, seek to afflict the comfortable and comfort the afflicted.”

As you can imagine, many people on Twitter posted comments about Gretchen’s speech. In the following exchange with fellow Tweeter Andrew Tomlinson @SleipnirPerkins we called out a few Wall Street Journal staff that many have accused of practicing access journalism. Immediately after I posted my “D- student” tweet, I was blocked by WSJ reporter Nick Timeraos. So, that peaked my curiosity wondering what he had to hide.

I then discovered a prime example of access journalism. Compare the following WSJ article posted online just after 8:30 PM on July 30, 2012 with a US Treasury Department news release posted the following morning on July 31, 2012. You be the judge whether Nick had access to information from Treasury prior to everyone else and whether he used his position at the WSJ to promote Treasury’s agenda.

Forgiveness of Debt Could Yield Savings

By NICK TIMIRAOS

July 30, 2012 8:38 p.m. ET

As the regulator for Fannie Mae and Freddie Mac nears its decision on whether to approve debt forgiveness for troubled borrowers, a new analysis by the regulator suggests taxpayers could benefit from the move, according to people briefed on the findings.

Fannie and Freddie could save about $3.6 billion more than current loss-mitigation approaches by reducing balances for some borrowers who owe much more than their homes are worth, these people said.

The Federal Housing Finance Agency is nearing a decision on whether to allow the companies to participate in the debt-forgiveness program that it consistently has resisted. Until now, the Federal Housing Finance Agency has maintained that the current housing-rescue programs offered by the taxpayer-supported mortgage companies are less-expensive options.

The new analysis was done because the Treasury Department said in January it would pick up part of the tab if the companies would reduce principal balances when modifying mortgages for troubled borrowers. It would use unspent housing funds from the $700 billion Troubled Asset Relief Program.

The Obama administration has argued strongly in favor of the FHFA adopting the principal-reduction program for Fannie and Freddie, saying it would provide more sustainable loan modifications. “We think there’s a set of cases where it’s clearly in the interest of the taxpayer for them to do principal reduction upfront,” said Treasury Secretary Timothy Geithner in congressional testimony earlier this year.

In April, the agency said that loan forgiveness would save about $1.7 billion for the companies, relative to other types of relief. At the time, the agency said that because the Treasury was paying to subsidize those write-downs, the relief would still cost taxpayers $2.1 billion, offsetting any savings to the companies.

But the latest analysis done by the agency found that such write-downs would generate $3.6 billion in savings for the companies, under certain assumptions, according to people familiar with the analysis. Even after subtracting the cost of the Treasury subsidies, the program would save $1 billion, these people said. As many as 500,000 borrowers could be eligible, these people said.

Spokeswomen for the Federal Housing Finance Agency and the Treasury Department declined to comment.

The FHFA has raised other concerns beyond the cost of such write-downs. Chief among them is the fear that more borrowers, upon hearing that Fannie and Freddie are instituting a debt-forgiveness program, might default to seek more generous terms. Fannie and Freddie were taken over by the U.S. government four years ago and have cost taxpayers about $145 billion.

A related worry is that unlike banks, which sometimes cut debts on loans they own, Fannie and Freddie would have to rely on hundreds of mortgage companies that manage payments on their behalf, creating greater operational headaches.

The Treasury Department rolled out the debt-forgiveness program in 2010. Fannie and Freddie opted against participating. The initiative, part of the administration’s Home Affordable Modification Program, is open to homeowners who have missed their mortgage payments or face imminent hardship and who owe more than their homes are worth.

The program has been increasingly adopted by mortgage servicers that handle deeply underwater loans which aren’t guaranteed by Fannie and Freddie. To qualify, homeowners must make at least three payments under the reduced loan amount, and principal balances are cut in installments over three years. The median principal amount reduced under the program has been $69,000.

Separately, Freddie Mac is preparing to expand rules devised to boost refinancing for borrowers with loans that the company guarantees, according to people familiar with the matter. The company currently allows its borrowers who are underwater or who have less than 20% equity to refinance with reduced documentation and fees under the Home Affordable Refinance Program.

The coming change will allow all borrowers with loans backed by the company, regardless of their loan-to-value ratio, to benefit from the streamlined program. Fannie Mae had already extended the HARP program to all borrowers, regardless of their equity position.

The FHFA last fall announced a sweeping revision of HARP guidelines, including eliminating a previous cap that limited the program to borrowers who owed up to 125% of their current property value.

But the Obama administration had been critical of the decision not to open up the program to borrowers with more home equity. “Have you ever heard of any program in any country at any time in history where borrowers with better collateral got a worse deal, or are even shut out altogether?” said Gene Sperling, director of the White House’s National Economic Council, in a speech to the National Association of Realtors in May.

I am writing in response to the decisions announced in your letter to Congress today. While I was encouraged that the Federal Housing Finance Agency (FHFA) is making progress on some initiatives we have discussed that will help the housing market recover, I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac (GSEs) to use targeted principal reduction in their loan modification programs.

FHFA is an independent federal agency, and I recognize that, as its Acting Director, you have the sole legal authority to make this decision. However, I do not believe it is the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market, and result in a net benefit to taxpayers.

Indeed, notwithstanding the selective numbers cited in your letter, FHFA’s own analysis, which you have shared with us previously, has shown that permitting the GSEs to participate in the Principal Reduction Alternative program (HAMP-PRA) could help up to half a million homeowners and result in savings to the GSEs of $3.6 billion compared to standard GSE loan modifications. Furthermore, if the GSEs were to participate in HAMP-PRA, taxpayers would save as much as $1 billion on a net basis. In view of the clear benefits that the use of principal reduction by the GSEs would have for homeowners, the housing market, and taxpayers, I urge you to reconsider this decision.

I have asked Michael Stegman of my staff to restate in writing for you the case for principal reduction, consistent with FHFA’s mandates as conservator and regulator of the GSEs, that the Treasury has made to you and your staff over the last several months. His memorandum is enclosed. Treasury stands ready to provide any additional analytical support to make a targeted principal reduction program at the GSEs successful.

We welcome the positive steps you announced today regarding further refinancing opportunities, providing clarity to lenders on legal exposures, aligning short sale practices, and putting foreclosed properties back on the market. All of these have the potential to help advance recovery of the housing market. As we have previously discussed, the impact of these steps will depend on the speed with which you act and the extent of the changes you make.

Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes, and the legacy of the crisis continues to weigh on the market. You have the power to help more struggling homeowners and heal the remaining damage from the housing crisis. I hope you will move to address these problems with a sense of urgency and force commensurate with the scale of the remaining challenges.

Sincerely,

Timothy F. Geithner

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If you like irony, consider if Nick did not block my access to his Twitter account, I would not have exposed his clandestine access to Timothy Geithner… karma is a curious thing! Perhaps the plaintiffs in the Fan/Fred trials should consider deposing Mr. Timiraus as he was evidently acting as an insider and his testimony could be contrasted with others. Perjury is an even more curious thing…

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6 thoughts on “Access Washington”

Nice! WSJ journalists seem sensitive over their conflicts of interest with gov and Wall Street versus reporting the news and facts. The gents you mentioned write the gov & WS party line. They have lost credibility in these matters.